Existing Home Sales Stabilizing at 5 Million

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It's beginning to look like the demand for existing homes has found an equilibrium. They sold at an annualized, seasonally adjusted rate of 5.05 million in April, according to the National Association of Realtors. That's nearly the same as their rate of 5.09 million in March. Unfortunately, this isn't not nearly enough to soak up all of the homes being dumped on the market by distressed homeowners. Inventory increased and prices fell. What's holding sales back?

First, here's the chart for existing home sales:

home sales 2011-04.png

You can see that over the past three months, sales have hovered around the 5 million mark. It's hard to make any meaningful assertions about the year before that, as the market was in a transition due to the expiration of the home buyer credit last spring. Its hangover may finally have worn off, so the market may be stabilizing at this level.

Unfortunately, that's not enough sales to keep prices from falling, as inventory has been rising for three months straight:

home inventory 2011-04.png

You can see that it jumped in April, by 9.9%. The 3.87 million homes available mark the highest number since September 2010. It also translates to 9.2 months of supply.

Prices have also declined over the past year. The median price in April was $163,700, down 5.0% from April 2010. These numbers are not seasonally adjusted, so it may not be that meaningful to compare it March. Prices declined the most in the northeast, which is also where sales were off by the most in April.

Why are sales so weak? Here's the analysis of NAR chief economist Lawrence Yun:

Given the great affordability conditions, job creation and pent-up demand, home sales should be stronger. Although existing-home sales are expected to trend up unevenly through next year, unnecessarily tight credit is continuing to restrain the market, along with a steady level of low appraisals that result in contract cancellations.

Unnecessarily tight credit? That's certainly debatable. According to reports, banks have using their cash to purchase government-guaranteed mortgage bonds, because there isn't enough demand out there for good loans. Surely they would prefer to get 4% to 6% on a mortgage with a reasonably strong borrower than a measly 3% to 4% on a mortgage bond. Indeed, credit has been expanded significantly over the past few years, as banks are much more comfortable lending. They just don't want to make the same mistakes they did in the past by providing loans to borrowers with poor credit performance.

As for the excuse that low appraisals are an obstacle, again, this is debatable. In reality, these low appraisals are probably accurate. One of the problems during the housing bubble was that appraisers were far too optimistic. Now sellers likely believe their home is worth more than it actually is in this weak market. As a result, appraisals are falling short. This is a legitimate feature of today's market, not a restraint that needs fixing.

In fact, buying demand is simply weak. As we saw in a poll yesterday, Americans view the housing market as having a tough road ahead. As a result, sales will be relatively low for some time.

Banks aren't likely to begin handing out mortgages like breath mints again anytime soon, and appraisers aren't likely to inflate home prices in a market where prices are falling. So neither of these factors will change much anytime soon. As a result, something near this level of sales will likely continue for a time. That will continue to put pressure on prices as home inventory rises. But the summer buying season may help a bit, unless buyers are just too worried about falling home prices for sales to heat up.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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